This Week in Barrons – 3-12-2017:
“The fundamental things apply – As Time Goes By”… Herman Hupfeld
Dear Mr. Sinatra:
Somedays I wish I could turn back time – back to when the fundamental things DID apply. The Snapchat IPO is my latest case in point. SNAP’s $29B market cap makes it larger than over 65% of the companies in the S&P 500. Couple that with their 2 whole years of sales history, massive losses, and all of their voting shares being controlled by two individuals barely born while you were alive – it’s a “case of do or die”.
But in many ways Mr. Sinatra: “It’s still the same old story” with the world being awash in oil. There is speculation surrounding how long any deal between OPEC and non-OPEC nations to limit production will hold up, but three elements are for sure: (a) U.S. shale oil production has come back with a vengeance (see below chart of rig count consistently increasing), (b) oil inventories stateside are swelling, and nobody was ready for this pullback in price (see price chart below).
I’ve heard rumors of a 20% ‘Border Adjustment Tax’ being placed on foreign oil to keep the domestic shale producers (and their banks) engaged and in business. I’ve also heard that Saudi Aramco (the $2T Saudi oil company that is going public in 2018) is ready to spend ‘whatever it takes’ to keep the price of oil elevated.
On Friday, I think the SEC exuded a little “passion, jealousy and hate” when they nixed the proposed formation of a Winklevoss Bitcoin Trust ETF. It seems they feel that the proposed ETF wasn't consistent with rules that require a security be "designed to prevent fraudulent and manipulative acts and practices, and to protect investors and the public interest." Secondly, the SEC felt that significant markets for bitcoin were non-regulated. I don’t understand, nobody talked about manipulation and non-regulation 2 weeks ago when more silver was shorted on a single U.S. exchange than produced globally during an entire year. And given the SEC allows investment in both Russian and Venezuelan ETFs, it goes without saying that ‘regulated’ would NOT be the word that comes to mind when I would describe both of those market places. But more than that, what I found interesting was the graph below showing the reaction within the precious metals market as soon as the Bitcoin decision was released. I can only assume that precious metal investors are frustrated at the blatant manipulation of their own markets, were hoping for a bitcoin alternative, and when none was forthcoming – dove back into their own manipulated and non-regulated markets.
Mr. Sinatra, today our government is so bloated, and faces huge budgetary constraints. I often remind myself of Peter Drucker’s quote: “It takes exponentially more people to manage more people; therefore, you should actually work on getting more done with less.” We the people (in thinking that our leaders could properly stimulate the economy) allowed our government to exceed their budgetary limits, borrow a lot of money, and make promises that they couldn’t keep. In fact, globally it’s virtually non-existent to find any country that runs a balanced budget, has a sound monetary policy, and hasn’t overpromised on entitlements. Therefore, there isn’t much that governments can do in terms of discretionary spending. Short of starting a war, the amount of truly impactful things that President Trump can do is limited. Governments can do very little to foster growth, aside from having simple policies, and getting out of their own way. But as the song says, “No matter what the future brings” – time will go by.
This week the non-farm payrolls report came out, and we were told that our nation has a 4.7% unemployment rate. They actually had the audacity to issue that number in the face of a dramatically declining workforce participation rate. When talking to SF this week and using numbers directly from www.bls.gov (without adjustments) – he calculated the unemployment percentage for adults (over 16) as 37.3% of the total population. WOW.
During the last 8 years, investors have had to endure: a flash crash, a downgrade of the U.S. credit rating, a debt-ceiling crisis, a taper tantrum, GrExit (Greece), BrExit (Britain), and Trump. The Fed kept the punch bowls full, and made sure any setback was quickly alleviated with easy money. Easy money forced many savers into riskier assets like stocks and high-yield bonds, but that was the price paid to keep the romance alive. The graph below shows that for the first time since the U.S. presidential election, stocks made more 52-week lows than made new 52-week highs.
Going back a little over a week, the market put in a huge 300-point UP day on Wednesday March 1st. Then the market spent the next 5 sessions giving it all back. On Thursday (the 6th session) it held the flat line, and with Friday’s jobs report we gained 7 on the S&P and 45 on the DOW. The jobs report estimates were for the creation of 190K jobs in February, but the actual number showed that 235K jobs were created. Naturally, the fact that 124K of those jobs were as a result of a fictitious ‘birth/death model’ didn’t stop us for going green on the day.
In normal times, I would easily suggest that the uptrend is intact, and we’re about to regain those points that we just gave up. But this Wednesday, the Federal Reserve is going to raise interest rates – which normally doesn’t bode well for a market. Secondly, the U.S. debt ceiling takes effect on the very same day. The new Treasury Secretary has already gone to Congress to start the process of getting the debt ceiling raised, but will they be willing to do it? And if they don’t do it – what happens?
It’s possible that we see a market reaction similar to what we saw after the last two ‘bad events’. With BrExit, everyone thought that the market would roll over and crash, and instead it began a 4-month climb. With Trump winning the presidency, everyone thought that the market would crash, but ‘in the wee hours of the night’ it reversed a 1000-point slide and ran to all-time highs. Then the day before Trump’s speech to Congress, the feeling was that if he didn't do well we would roll over, and instead we gained 300 points the next day.
So, it’s certainly possible that the market reacts to the rate hike and debt ceiling the same way. Or because this market is so over-bloated that they could use the rate hike as the excuse to pull its plug. Some think that the debt ceiling is going to be the last straw. They feel that the Congressional Anti-Trumps will block everything, and force a Government shut-down that would make Trump look bad. That’s certainly a possibility. So, over the next couple weeks, all heck could break loose, or they could ignore it all and continue this mindless romp higher. That's how divided things are right now. I continue to nibble long, but with small size. If this market rolls over, I don't want a ton of exposure. And if it gets back above its March 1st high, then I will get longer.
Last week I mentioned investing in inverse ETF’s as my 2nd best way to invest in a downward facing market – and correctly BL wrote me and mentioned that both Morgan Stanley and Raymond James have BANNED all inverse products. The ONLY short ETF allowed for use at each of those firms is HDGE, and I whole-heartedly recommend that product as well.
This coming week is a ‘primary’ market options expiration week, and an FOMC meeting. The SPX (the proxy for the S&P 500) has an expected to move for this week that is 50% greater than the expected move for last week. That means that this coming week should be 50% MORE volatile than last week. In fact, at no point in the last 6 weeks has the expected move been this large. And these days, the SPX and its related products control over 1/3rd of the total options/market activity. The only reason that I’m bringing this up is that if the SPX (currently @ 2372) were to move lower than 2342 or higher than 2402 – the markets are poised to move an additional 60 points lower or higher in a hurry. Watch the financials and oil. If both financials and energy continue to move lower, it will drive the SPX to the lower part of its range – and that will spell danger in a hurry.
- AK Steel (AKS) & Fleetcor Technologies (FLT): They have no support underneath their respective bear flags – so any move to the downside is shortable on Monday morning.
- Nucor Steel (NUE) moves with U.S. Steel (X) – only slower,
- Incyte Corp. (INCY) was a takeover candidate by Gilead Pharmaceutical (GILD) on Friday afternoon. If they don’t announce it on Monday, then short INCY at the open on Monday.
Selloffs normally start with Consolidation and then Divergences:
- Watch the foreign markets for any breakdowns.
- Watch the bonds to see if they continue their downward slide.
- Watch the Russell Small-Cap Index (RUT / IWM) to see if it continues moving lower and takes the SPX with it.
- Watch to see if the SPX gets under its Average True Range (ATR) trailing stop on a daily chart.
- Watch the other sectors such as: transports, technology, banking and energy – because EVERY selloff in the SPX has been preceded by a selloff in one or more of these sectors.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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